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10
FUTURES BASICS:
Front and
back months p. 22
CONTENTS
continued on p. 4
A
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CONTRIBUTORS
CONTRIBUTORS
Ad sales
Jim Graham (advisor@optionvue.com) is the product
West Coast and Southwest only:
Allison Chee manager for OptionVue Systems and a registered investment
achee@futuresandoptionstrader.com advisor for OptionVue Research.
Metals
Gold reclaimed $1,000 in September after staging a strong
rally in late August. December gold (GCZ09) climbed 9
percent from an Aug. 17 close of 935.80 to a Sept. 16 close
of 1020.20 before pulling back.
And once again, gold’s upthrust overshadowed an even more powerful
move in silver. The December contract (SIZ09) rocketed more than 25 per-
cent during the same period.
Copper, which launched a summer rally earlier than its higher-profile
counterparts, extended the rounded consolidation it began in mid-August.
The December contract (HGZ09) was trading around 2.770 on Oct. 1 —
pretty much where it had been in early August.
Grains
For the most part, the re-
cent downtrend in Energy
grains slowed in
September, but the sec- As October ar-
tor failed to make any rived, energy fu-
decisive move to the upside. tures were still
Wheat was the weakest market, trading in chop-
with the December contract (WZ09) py, slightly bear-
falling to new lows (below 440) in ish fashion in the
late September and early October. wake of their late-July rallies. December
December corn (CZ09) stabilized crude oil (CLZ09), after pushing above $75
after falling to 300 in early September, bouncing in August, gradually stuttered lower to
back above 340 by the end of the month. $65.55 on Sept. 24.
November soybeans (SX09) followed a jagged While gasoline and heating oil basically
path in recent months, leaping higher in late July followed crude’s lead, natural gas bucked
only to fall back near contract lows by the sector’s trend (or rather, lack thereof) by
September. rallying off its lows in early September. The
November rice (RRX09), which had bucked December contract (NGZ09), which had
the bearish grain trend during part of the sum- failed to rebound in the spring with the rest
mer, seesawed lower in August and September, of the sector, closed at 4.486 on Sept. 7, but
but as of Oct. 1 was still well above its late-June subsequently jumped more than 26 percent
low. to close at 5.666 on Sept. 25.
Implied volatility:
An overlooked tool for stock and futures traders
Implied volatility isn’t just for option players — it can provide useful market estimates
and forward-looking support and resistance levels for all traders.
BY KEITH SCHAP
Note: A version of this article originally FIGURE 1 — E-MINI DOW FUTURES PRICES
appeared in the April 2006 issue of
This chart shows the December 2004-March 2006 individual contract price data
Active Trader magazine.
for the mini Dow futures (YM).
Make the volatility numbers meaningful 1. Locate the number of seven or 21-day periods in a year
Suppose the E-Mini Dow futures (YM) are trading at 10,900, by dividing 365 by seven or 21:
and the implied volatility for an at-the-money (ATM) call
on these futures is 11 percent. This implied volatility value 365/7 = 52.14 365/21 = 17.38
means the market is saying there is a 68-percent probability
the futures price one year from now will fall somewhere in 2. Find the square root of the number of periods:
a range plus or minus 11 percent from the current price.
Given the 10,900 futures price, 11 percent is 1,199, so one 52.14 = 7.22 17.38 = 4.17
year forward there is a 68-percent probability the futures
price will fall somewhere between 12,099 and 9,701. 3. Convert the volatility to decimal form (11 percent
For traders, this is not particularly useful information. becomes 0.11) and divide by the square root:
Traders typically deal with shorter trade horizons.
Fortunately, a little arithmetic can make the information 0.11/7.22 = 0.0152 0.11/4.17 = 0.0264
more relevant to specific trade planning.
5. Round the results from the fourth step to the nearest 365/28 = 13.04
whole number (the mini Dow futures prices do not 13.04 = 3.61
have fractions) and add them to and subtract them 0.1491/3.61 = 0.0413
from the current price: 10,166 * 0.0413 = 419.88, round to 420
10,166 + 420 = 10,586
10,900 + 166 = 11,066 10,900 + 288 = 11,188 10,166 - 420 = 9,746
10,900 - 166 = 10,734 10,900 - 288 = 10,612
These upper and lower boundaries predict a 68-percent
The prices resulting from the final step in the left column probability the price 28 days forward will fall between
indicate a 68-percent probability the futures price seven 10,586 and 9,746. Sept. 1, 2004, was a Wednesday and 28
days forward will fall somewhere between 11,066 and days forward was Wednesday, Sept. 29. On that day, the
10,734. They offer the same level of confidence the futures December mini Dow price was 10,123, which was within
price 21 days forward will fall somewhere between 11,188 the predicted range.
and 10,612. Finally, Figures 3 and 4 show the results of carrying out
In a normal distribution, this 68-percent probability will this forward placement of the implied volatility predictions
encompass plus or minus one standard deviation of all val- for the entire 16-month period covered in the figures. There
ues (prices). Plus or minus two standard deviations produces are only a few places where the current price traded over or
approximately 95 percent confidence. To find this wider under the one standard deviation boundaries. Based on
range, simply double the factors resulting from the fourth these charts, these implied volatility predictions seem to
step to 332 for seven days and 576 for 21 days. This indicates have some value.
there is a 95 percent probability the futures price seven days
forward will fall somewhere between 11,232 and 10,568. The Using implied volatility predictions
price 21 days forward is this likely to fall somewhere These predictions can be useful in a variety of ways. They can
between 11,476 and 10,324. help traders evaluate the claims of analysts concerning what
continued on p. 12
Testing the predictions
Using implied volatility to make pre- FIGURE 2 — 10-YEAR TREASURY NOTE FUTURES PRICES
dictions such as these is one thing,
knowing whether they prove out in This chart shows the December 2004-March 2006 contract prices for the
10-year T-note futures (TY).
practice is another. To test these pre-
dictions, let’s consider two markets —
the E-Mini Dow and 10-year T-note
futures (TY) — from Sept. 1, 2004, to
Jan. 3, 2006.
Figures 1 and 2 show the prices for a
sequence of contracts in each market.
For example, the Sept. 1 to Nov. 30,
2004, segment in Figure 1 tracks
December mini Dow futures (YMZ4),
the Dec. 1, 2004, to Feb. 28, 2005 seg-
ment tracks March futures (YMH5),
and so on. Figure 2 provides similar
data for 10-year T-note futures.
Figures 3 and 4 make the futures
prices from Figures 1 and 2 continu-
ous. (This results from collapsing six
columns into one on a spreadsheet to
make the volatility calculations sim-
pler to manage.) Also, the one stan-
dard deviation boundaries shown on
BY JOHN SUMMA
Note: A version of this article originally appeared in the March 2005 ronments such as the one the market was in during much of
issue of Active Trader magazine. 2004 (which carries the possibility of a sudden volatility
increase), offer a special edge not available with a conven-
“vertical” credit spread consists of a short out- tional vertical credit spread.
TABLE 1 — VERTICAL PUT CREDIT SPREAD TABLE 2 — PROFITING FROM TIME DECAY
Because you are selling a more expensive option and buying Because the position’s net theta is positive, it means the
a cheaper one, the vertical put spread creates a net credit. spread profits from time decay as expiration approaches.
Typically, most S&P 500 futures-option spreaders will $68.40 in time decay per day, which means the spread is
write options with two to six weeks remaining until expira- profiting at a rate of $44.70 per day. Because time value
tion and strike prices at least one standard deviation from decays at an accelerating rate, the potential gains increase
the underlying price. These parameters generally provide with each passing day, all other factors remaining the same.
for the necessities of position management while offering Because the options can only decline to zero, regardless
enough premium relative to transaction costs. However, of the time decay rate, the maximum profit potential of the
should the underlying move too far, there is potential for standard vertical put spread is always the initial net credit.
large losses if position adjustments are not made. Assuming both options remain out of the money, the profit
Table 1 shows an example of a vertical put spread. With before commissions and fees would be $287.50. This is the
the December 2004 S&P 500 futures (SPZ04) at 1189.40, the shortcoming of this strategy –– you can only achieve this
spread consisted of a long December 1135 put and a short profit if these options expire worthless, regardless of the
December 1155 put for a credit of 1.15, or $287.50. (Each volatility level or underlying price movement.
point of S&P 500 option premium is worth $250.) The short continued on p. 16
leg of the spread is just
less than 35 points out of FIGURE 1 — PROFITABILITY AND PROBABILITY
the money, which is just
shy of two standard devi- The diagonal put spread has an expected profit of $388, $100 or so more than the original
vertical put spread. Also, as you move lower along the price axis, the positions vega increases.
ations. (The hypothetical
position expired prof-
itably on Friday, Dec. 16,
2004, 10 trading days
after they were selected.) Profit/loss
At the prevailing volatili- at December
ty levels and distance expiration
from the money (approx-
imately two standard
deviations), this trade has
an expected probability
of profit of 97 percent.
Table 2 shows the theta
values for each option in
the spread and under-
scores how this strategy
makes money. The long
December 1135 put loses
$23.70 in time decay per
day but the short Source: OptionVue5 Option Analysis Software (www.optionvue.com)
December 1155 put gains
If the S&P is at 1160 at expiration (which represents an approximately 3-percent drop from
where the index was when the diagonal spread was established), the maximum profit
increases to $900 from the original vertical spread’s $287.50 profit. The increased profit If the S&P corrects,
occurs because the January 1070 put can capitalize on both the additional volatility and say, 1 to 3 percent, as it
downside price movement. has periodically through-
out the past few years
since its bullish move off
the 2002 lows, any mod-
est volatility spikes
Profit/loss
(volatility rises when
at December
expiration equity futures decline)
can quickly add value to
put options. A diagonal
put spread has the ability
to turn these events into
potential profits, while a
vertical put spread
remains limited to the
premium collected when
the spread was placed.
— CONTACT —
Bob Dorman Allison Chee Mark Seger
Ad sales East Coast and Midwest Ad sales West Coast and Southwest Account Executive
bdorman@activetradermag.com achee@activetradermag.com seger@activetradermag.com
(312) 775-5421 (415) 272-0999 (312) 377-9435
Double butterflies
on the S&P 500
Market: Options on the S&P 500 FIGURE 1 — DOUBLE LONG BUTTERFLY SPREAD
index (SPX). This strategy could This double long butterfly risks $4,870 and has a maximum potential profit of more
also be applied to other equity than 200 percent at expiration. But the strategy aims for 10-percent profits each
month.
indices, ETFs, and stocks with liq-
uid options contracts.
BY FOT STAFF
n the futures market, “front January contract stops trading on the tract (followed by the first back
TradeStation now offers its clients integrated update feature covering North American, European, and
Commitments of Traders (COT) data at no additional cost. Asian markets. You can sign up for the free market update
The Commodity Futures Trading Commission (CFTC) pro- by selecting the “Click here for free Market Updates” link at
vides this weekly information about the purchases and www.tradethenews.com. The market updates provide read-
sales of futures contracts. COT data gives a detailed break- ers with insight into the day-to-day performance in global
down of the number of futures contracts held long, short, or markets at key junctures during trading hours. Those who
spread by commercial traders (producers and consumers of subscribe to the free market updates will also receive the
commodities), non-commercial traders (large speculators weekly wrap-up every Friday. The report brings together
such as hedge funds), and other speculative (smaller) the past week’s market activity, providing in-depth analysis
traders, and may be used for fundamental analysis of the of the events of the week.
futures markets. COT data can be used to show which
groups of traders have a position bias in a market direction, TAG debuted two new options products at the FIA OIC
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groups are increasing or decreasing position size. For more can look up any options equity symbol, on any day, at any
information, visit the support center at TradeStation.com time, in any market center in the U.S., Europe, or Canada, in
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COT materials and watch a narrated video demonstration The Order Routing Comparison Tool simultaneously com-
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CME Group has launched a new financially settled find risk-controlled trades in real-time. The new real-time
European gasoil (ICE) futures contract. This contract allows scanner cuts search time down by alerting traders automat-
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modity code for this contract is 7F, and it is listed for 36 con-
secutive months with the first contract month of September BCS Financial Group, a direct market access equity
2009. CME Group also launched three new financially set- and derivatives broker, has partnered with CQG to provide
tled five decimals natural gas liquids swap futures con- its 400 customers and internal trading desks in Russia
tracts. These contracts offer CME Group customers the abil- access to CQG’s trading platforms. Customers clearing
ity to price at an eighth of a cent (five decimal places). The through BCS will have access to CQG’s leading decision-
contracts and commodity codes for the new swap futures making tools, accurate consolidated market data, and
are Mont Belvieu LDH propane five decimals (OPIS) (B0); advanced electronic trading via the CQG Trader and CQG
Mont Belvieu ethane five decimals (OPIS) (C0); and Mont Integrated Client platforms. BCS traders will be able to
Belvieu normal butane five decimals (OPIS) (D0). The first route orders to many exchanges. For more information visit
listed month is the September 2009 contract. The propane www.cqg.com.
contract is listed for up to 48 consecutive months and the
Note: The New Products and Services section is a forum for industry
other contracts are listed for 36 consecutive months. For
businesses to announce new products and upgrades. Listings are adapted
more information visit www.cmegroup.com/clearport. from press releases and are not endorsements or recommendations from
the Active Trader Magazine Group. E-mail press releases to
TradeTheNews.com has introduced a new market editorial@futuresandoptionstrader.com. Publication is not guaranteed.
Legend
day moves, 20-day moves, etc.) show the per- larger than all the past readings, while a read-
Volume: 30-day average daily volume, in thou- centile rank of the most recent move to a certain ing of 0 percent means the current reading is
sands (unless otherwise indicated). number of the previous moves of the same size smaller than the previous readings. These fig-
OI: Open interest, in thousands (unless other- and in the same direction. For example, the ures provide perspective for determining how
wise indicated). rank for 10-day move shows how the most relatively large or small the most recent price
10-day move: The percentage price move from recent 10-day move compares to the past twen- move is compared to past price moves.
the close 10 days ago to today’s close. ty 10-day moves; for the 20-day move, the rank Volatility ratio/rank: The ratio is the short-term
20-day move: The percentage price move from field shows how the most recent 20-day move volatility (10-day standard deviation of prices)
the close 20 days ago to today’s close. compares to the past sixty 20-day moves; for divided by the long-term volatility (100-day stan-
the 60-day move, the rank field shows how the dard deviation of prices). The rank is the per-
60-day move: The percentage price move from most recent 60-day move compares to the past
the close 60 days ago to today’s close. centile rank of the volatility ratio over the past
one-hundred-twenty 60-day moves. A reading 60 days.
The “rank” fields for each time window (10- of 100 percent means the current reading is
This information is for educational purposes only. Futures & Options Trader provides this data in good faith, but it cannot guarantee its accuracy or timeliness. Futures & Options
Trader assumes no responsibility for the use of this information. Futures & Options Trader does not recommend buying or selling any market, nor does it solicit orders to buy
or sell any market. There is a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market.
24 October 2009 • FUTURES & OPTIONS TRADER
OPTIONS RADAR (as of Sept. 28)
MOST-LIQUID OPTIONS*
Indices Symbol Exchange Options Open 10-day move / 20-day move / IV / IV / SV ratio —
volume interest rank rank SV ratio 20 days ago
S&P 500 index SPX CBOE 165.4 1.40 M 1.30% / 31% 3.31% / 28% 22.9% / 17.3% 21.8% / 17.1%
S&P 500 volatility index VIX CBOE 117.2 2.06 M 4.27% / 38% 0.48% / 5% 90.6% / 81.6% 155.8% / 71.9%
Russell 2000 index RUT CBOE 60.8 481.9 2.20% / 38% 5.75% / 39% 28.1% / 24% 26.3% / 22.7%
E-Mini S&P 500 futures ES CME 27.7 135.4 1.49% / 41% 3.07% / 20% 22.9% / 19.6% 21.9% / 21%
Nasdaq 100 index NDX CBOE 16.1 146.2 1.82% / 33% 4.95% / 43% 23.5% / 18.3% 23% / 19.3%
Stocks
General Electric GE 200.0 3.01 M 9.19% / 44% 19.03% / 70% 47.2% / 49.8% 40% / 34.3%
Bank of America BAC 130.9 2.96 M 1.35% / 13% -4.23% / 64% 51.7% / 40.2% 49.8% / 44.9%
Apple Inc. AAPL 99.9 734.4 7.16% / 75% 9.47% / 49% 36.1% / 26% 30.8% / 22.7%
Altria Group MO 88.3 322.1 -1.78% / 40% -3.02% / 40% 22.2% / 18.2% 20.4% / 17.5%
Research in Motion RIMM 65.5 460.4 -18.39% / 100% -10.01% / 65% 49.6% / 35.1% 48.1% / 35.4%
Futures
Eurodollar ED CME 102.6 5.23 M 0.05% / 30% -0.06% / 78% 123.4% / 139% 103.7% / 56.5%
Corn C CME 40.1 560.0 6.61% / 83% 5.48% / 71% 34.8% / 47.3% 35% / 41.7%
E-Mini S&P 500 futures ES CME 27.7 135.4 1.49% / 41% 3.07% / 20% 22.9% / 19.6% 21.9% / 21%
Soybeans S CME 16.1 149.4 1.14% / 33% -19.04% / 98% 29.3% / 34.3% 36.2% / 34.6%
10-year T-notes TY CME 13.3 230.7 0.75% / 86% 0.04% / 5% 7.6% / 5.9% 7.9% / 6.8%
VOLATILITY EXTREMES**
Indices - High IV/SV ratio
S&P 100 index OEX CBOE 14.1 87.3 1.48% / 44% 2.92% / 26% 21.5% / 15.6% 20.7% / 16.1%
Dow Jones index DJX CBOE 5.9 151.7 1.68% / 47% 2.57% / 24% 20.1% / 14.6% 19.8% / 16.1%
S&P 100 index (European style) XEO CBOE 4.0 46.3 1.48% / 44% 2.92% / 26% 20.8% / 15.6% 19.9% / 16.6%
S&P 500 index SPX CBOE 165.4 1.40 M 1.30% / 31% 3.31% / 28% 22.9% / 17.3% 21.8% / 17.1%
S&P 500 futures SP CME 12.4 69.9 1.49% / 40% 3.85% / 37% 23.5% / 17.9% 19.8% / 17.2%
LEGEND:
Options volume: 20-day average daily options volume (in thousands unless otherwise indicated).
Open interest: 20-day average daily options open interest (in thousands unless otherwise indicated).
IV/SV ratio: Overall average implied volatility of all options divided by statistical volatility of underlying instrument.
10-day move: The underlying’s percentage price move from the close 10 days ago to today’s close.
20-day move: The underlying’s percentage price move from the close 20 days ago to today’s close. The “rank” fields for each time window (10-day moves, 20-day
moves) show the percentile rank of the most recent move to a certain number of previous moves of the same size and in the same direction. For example, the “rank”
for 10-day moves shows how the most recent 10-day move compares to the past twenty 10-day moves; for the 20-day move, the “rank” field shows how the most
recent 20-day move compares to the past sixty 20-day moves.
Options Watch: Stocks and ETFs with high options volume (as of Sept. 29) Compiled by Tristan Yates
The following table summarizes the expiration months available for 20 stocks and ETFs with the largest options volume (measured in dollars). It
also shows each stock’s average bid-ask spread for at-the-money (ATM) October options. The information does NOT constitute trade signals. It is
intended only to provide a brief synopsis of potential slippage in each option market.
spread as %
Sept.
June
April
Dec.
Dec.
Dec.
Nov.
Feb.
Jan.
Jan.
Jan.
Oct.
May
Stock of underlying
Stock Ticker price Call Put price
S&P 500 tracking stock SPY X X X X X X X X 106.00 0.04 0.04 0.04%
Apple Inc. AAPL X X X X X X 185.38 0.08 0.10 0.05%
PowerShares QQQ Trust QQQQ X X X X X X X X 42.22 0.03 0.03 0.07%
Google GOOG X X X X X X 498.53 0.33 0.38 0.07%
Baidu Inc. BIDU X X X X X X 394.92 0.33 0.25 0.07%
Bank of America BAC X X X X X X 17.16 0.02 0.01 0.07%
iShares Russell 2000 index IWM X X X X X X X X X X 60.99 0.05 0.06 0.08%
Research in Motion RIMM X X X X X X 67.64 0.08 0.08 0.12%
Priceline.com PCLN X X X X X X 167.00 0.25 0.28 0.16%
American International Group AIG X X X X X X 45.22 0.11 0.13 0.26%
Citigroup C X X X X X X 4.70 0.01 0.01 0.27%
Vanguard FTSE All-World Ex-US VEU X X X X X X 43.04 0.31 0.29 0.70%
Thomson Reuters Corp. TRI X X X X 33.42 0.19 0.33 0.77%
Doctor Reddy's Lab RDY X X X X 19.25 0.16 0.18 0.88%
SLM Corp. SLM X X X X X X 8.91 0.09 0.08 0.91%
Cabot CBT X X X X 23.73 0.23 0.21 0.92%
HRPT Properties Trust HRP X X X X 7.86 0.16 0.15 1.99%
Monarch Casino & Resort MCRI X X X X 10.90 0.21 0.23 2.01%
RPC Inc. RES X X X X X 10.49 0.43 0.29 3.40%
Proshares Dynamic Small Cap Growth PWT X X X X 12.02 NA NA NA
Legend:
Call: Four-day average difference between bid and ask prices for the front-month ATM call.
Put: Four-day average difference between bid and ask prices for the front-month ATM put.
Bid-ask spread as % of underlying price: Average difference between bid and ask prices for front-month, ATM call, and put divided by the underlying's closing price.
Calendar spread: A position with one short-term short Covered call: Shorting an out-of-the-money call option
option and one long same-strike option with more time against a long position in the underlying market. An exam-
until expiration. If the spread uses ATM options, it is mar- ple would be purchasing a stock for $50 and selling a call
ket-neutral and tries to profit from time decay. However, option with a strike price of $55. The goal is for the market
OTM options can be used to profit from both a directional to move sideways or slightly higher and for the call option
move and time decay. to expire worthless, in which case you keep the premium.
Call option: An option that gives the owner the right, but Credit spread: A position that collects more premium
not the obligation, to buy a stock (or futures contract) at a from short options than you pay for long options. A credit
fixed price. spread using calls is bearish, while a credit spread using
puts is bullish.
The Commitments of Traders report: Published
weekly by the Commodity Futures Trading Commission Debit spread: An options spread that costs money to
(CFTC), the Commitments of Traders (COT) report breaks enter, because the long side is more expensive that the short
down the open interest in major futures markets. Clearing side. These spreads can be verticals, calendars, or diagonals.
members, futures commission merchants, and foreign bro- continued on p. 26
Delivery period (delivery dates): The specific time Physical delivery: The process of exchanging a physical
period during which a delivery can occur for a futures con- commodity (and making and taking payment) as a result of
tract. These dates vary from market to market and are deter- the execution of a futures contract. Although 98 percent of
mined by the exchange. They typically fall during the all futures contracts are not delivered, there are market par-
month designated by a specific contract — e.g. the delivery ticipants who do take delivery of physically settled con-
period for March T-notes will be a specific period in March. tracts such as wheat, crude oil, and T-notes. Commodities
generally are delivered to a designated warehouse; T-note
Diagonal spread: A position consisting of options with delivery is taken by a book-entry transfer of ownership,
different expiration dates and different strike prices — e.g., although no certificates change hands.
a December 50 call and a January 60 call.
Premium: The price of an option.
European style: An option that can only be exercised at
expiration, not before. Put option: An option that gives the owner the right, but
not the obligation, to sell a stock (or futures contract) at a
Exercise: To exchange an option for the underlying fixed price.
instrument.
Put ratio backspread: A bearish ratio spread that con-
Expiration: The last day on which an option can be exer- tains more long puts than short ones. The short strikes are
cised and exchanged for the underlying instrument (usual- closer to the money and the long strikes are further from the
ly the last trading day or one day after). money.
For example, if a stock trades at $50, you could sell one
In the money (ITM): A call option with a strike price $45 put and buy two $40 puts in the same expiration month.
below the price of the underlying instrument, or a put If the stock drops, the short $45 put might move into the
option with a strike price above the underlying instru- money, but the long lower-strike puts will hedge some (or
ment’s price. all) of those losses. If the stock drops well below $40, poten-
tial gains are unlimited until it reaches zero.
Intrinsic value: The difference between the strike price
of an in-the-money option and the underlying asset price. A Put spreads: Vertical spreads with puts sharing the same
call option with a strike price of 22 has 2 points of intrinsic expiration date but different strike prices. A bull put spread
value if the underlying market is trading at 24. contains short, higher-strike puts and long, lower-strike
puts. A bear put spread is structured differently: Its long
Naked option: A position that involves selling an unpro- puts have higher strikes than the short puts.
tected call or put that has a large or unlimited amount of
risk. If you sell a call, for example, you are obligated to sell Simple moving average: A simple moving average
the underlying instrument at the call’s strike price, which (SMA) is the average price of a stock, future, or other mar-
might be below the market’s value, triggering a loss. If you ket over a certain time period. A five-day SMA is the sum of
sell a put, for example, you are obligated to buy the under- the five most recent closing prices divided by five, which
lying instrument at the put’s strike price, which may be well means each day’s price is equally weighted in the calcula-
above the market, also causing a loss. tion.
Given its risk, selling naked options is only for advanced
options traders, and newer traders aren’t usually allowed Straddle: A non-directional option spread that typically
by their brokers to trade such strategies. consists of an at-the-money call and at-the-money put with
the same expiration. For example, with the underlying
Naked (uncovered) puts: Selling put options to collect instrument trading at 25, a standard long straddle would
premium that contains risk. If the market drops below the consist of buying a 25 call and a 25 put. Long straddles are
short put’s strike price, the holder may exercise it, requiring designed to profit from an increase in volatility; short strad-
you to buy stock at the strike price (i.e., above the market). dles are intended to capitalize on declining volatility. The
strangle is a related strategy.
Near the money: An option whose strike price is close
to the underlying market’s price. Strangle: A non-directional option spread that consists of
an out-of-the-money call and out-of-the-money put with
Open interest: The number of options that have not the same expiration. For example, with the underlying
been exercised in a specific contract that has not yet expired. instrument trading at 25, a long strangle could consist of
buying a 27.5 call and a 22.5 put. Long strangles are
Out of the money (OTM): A call option with a strike designed to profit from an increase in volatility; short stran-
price above the price of the underlying instrument, or a put gles are intended to capitalize on declining volatility. The
option with a strike price below the underlying instru- straddle is a related strategy.
ment’s price.
Strike (“exercise”) price: The price at which an under-
Parity: An option trading at its intrinsic value. lying instrument is exchanged upon exercise of an option.
EVENTS
Event: Financial Markets World’s Location: Sydney Convention & Exhibition Centre
Risk Management for Non-Quants For more information: Go to
Date: Oct. 7-8 http://tradingandinvestingexpo.com.au
Location: Bayards, New York City
For more information: Visit www.fmwonline.com Event: Lawrence G. McMillan’s
Intensive Options Seminar
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Date: Oct. 14-16 Location: New York City, Marriott Marquis
Location: Barcelona, Spain For more information: Go to
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Event: TradeStation Futures Symposium Event: The Fifth Middle East Forex Trading Expo and
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Location: Naples, Fla. For more information: www.meforexexpo.com
For more information: Visit
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Date: Nov. 18-21
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Date: Oct. 19 For more information: www.tradersexpo.com
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Location: Marriott Marquis Hotel, New York, N.Y.
Event: Sydney Trading & Investing Expo For more information: www.tradersexpo.com
Date: Oct. 30-31
TRADE
TRADE SUMMARY
P/L
Date Contract Entry Initial stop Initial target IRR Exit Date Point % LOP LOL Length
9/22/09 GCZ09 1,015.70 998.70 1,031.00 .90 998.70 9/24/09 -17 -1.67% 5.30 -17 2 days
Legend: IRR — initial reward/risk ratio (initial target amount/initial stop amount); LOP — largest open profit (maximum available profit
during lifetime of trade); LOL — largest open loss (maximum potential loss during life of trade).
TRADE
RESULT
THIS
THISMONTH’S
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